Unpleasant Surprises Could Be In Store For CRA International, Inc.'s (NASDAQ:CRAI) Shares

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 18x, you may consider CRA International, Inc. (NASDAQ:CRAI) as a stock to potentially avoid with its 26.2x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

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CRA International certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

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If you'd like to see what analysts are forecasting going forward, you should check out our free report on CRA International.

How Is CRA International's Growth Trending?

There's an inherent assumption that a company should outperform the market for P/E ratios like CRA International's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 21% last year. As a result, it also grew EPS by 29% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 13% over the next year. That's shaping up to be similar to the 13% growth forecast for the broader market.

With this information, we find it interesting that CRA International is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Key Takeaway

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that CRA International currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with CRA International, and understanding should be part of your investment process.

If you're unsure about the strength of CRA International's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.